SUBMISSION TO NEW ZEALAND COMMERCE COMMISSION on application by AIR NEW ZEALAND LIMITED & QANTAS AIRWAYS LIMITED Seeking Authorisation of Certain Restrictive Trade Practices and of a Proposed Business Acquisition 18/02/2003 12:28 CONTENTS 1 Summary of Submission 2 Interests of Submitting Parties 3 Claimed benefits & detriments of Alliance 4 Impacts on markets if Alliance is authorised 5 Impacts on markets if authorisation is refused 6 Undertakings offered by the Applicants 7 Conclusions and recommendations 18/02/2003 12:28 1 SUMMARY OF SUBMISSION 1.1 The Parties to this Submission agree with the Applicants that New Zealand and Australia need robust, locally based international airlines, and that conditions in the global airline services market are threatening to them and likely to remain so for the next five years. 1.2 The Alliance represents a means of strengthening the global market competitiveness of the two dominant, locally based international carriers, but – in the form proposed - it would do so to the substantial detriment of competition in the airline and related services markets of and between New Zealand and Australia. 1.3 Public benefits claimed for the proposed Alliance by the Applicants and their consultants, the Network Economics Consulting Group (NECG) are excessive and competitive detriments are undervalued in the publicly available material they have provided. 1.4 The Applicants’ claim that “one of the most significant impacts of the Transactions is that they are likely to increase the spread of in-flight service quality in the market, by hastening the entry and expansion of a VBA service.” (Application, p103) is particularly difficult to accept. 1.5 The undertakings offered by the Applicants to diminish anti-competitive detriments created by their Alliance and to facilitate new entry by a VBA competitor are minimal and ineffectual. 1.6 Structural changes to the operations of the Applicants in the airline services and travel distribution services markets are needed before detriments will be reduced to a level where public benefits merit authorisation of restrictive trade practices which are an inherent part of the proposed Alliance’s operation. These changes include the divestment of certain businesses such as the Freedom airline and wholesale and retail travel operations. 1.7 The Parties to this Submission are prepared to participate in the process of facilitating such structural change as potential purchasers of business operations which are to be divested to reduce competitive detriments to acceptable levels and to secure the public benefits of the proposed Alliance. 18/02/2003 12:28 2 INTERESTS OF PARTIES 2.1` The parties to this submission are United Travel Limited, which operates in the New Zealand retail travel market, and the Biztrav Business Travel group , which operates in the New Zealand corporate travel market. 2.2 Formed 30 years ago, United Travel has over 95 locations under the United Travel Franchise Group umbrella and 69 of these are branded United Travel, with members in every major centre through New Zealand. The Group provides Gullivers Holidays with more than 40% of its wholesale and consolidation business. Overall the group secures more than 30% of all travel revenues from New Zealand. 2.3 Biztrav BusinessTravel comprises of a group of more than 25 independent travel agencies specialising in the provision of corporate travel services throughout New Zealand and who together secure the business and leisure travel requirements of more than 30% of the corporate travel market. 2.4 The two organisations are also parties to a broader submission by a Travel Agents Group which is also being made to the Commission. However, United Travel and Biztrav have a particular and separate interest in the Application under consideration by the Commission. 2.5 The parties to this submission are interested in acquiring or establishing a VBA carrier, with a potential to operate competitively in the New Zealand domestic, trans-Tasman, and short-haul international markets. 2.6 The parties see this development as an opportunity to sustain their business against trends that are affecting their prospects as stand-alone enterprises in the travel product and services distribution sector. 2.7 The parties to this Submission also support submissions that have been presented to the Commission on behalf of: • The Travel Agents’ Group (Gullivers Pacific Group, Gullivers Pacific, Holiday Shoppe, United Travel, Biztrav, Atlantic Pacific Radius, Signature Travel, and Synergi Travel) • The Travel Agencies Association of New Zealand; and • the New Zealand Inbound Tour Operators’ Council. 2.8 The parties to this submission request that all correspondence and notices in respect of this submission be directed in the first instance to 18/02/2003 12:28 Murray Tanner United Travel P O Box 2698 Auckland Phone : 307 1891 Email : [email protected] 18/02/2003 12:28 3. CLAIMED BENEFITS & DETRIMENTS OF ALLIANCE 3.1 Public benefits claimed for the proposed Alliance appear to be exaggerated and detriments have been undervalued in the publicly available Submissions made by the Applicants. We address the claimed benefits first. 3.2 Increased tourism 3.2.1 The major benefits claimed for the Alliance by the Applicants arise from claims that it would increase the volume of inbound tourism to New Zealand that can be generated by additional dual destinational (New Zealand – Australia) marketing activity to be carried out by Qantas Holidays. 3.2.2 Recent trends which see the New Zealand inbound tourism market growing faster than the Australian inbound tourism market do not suggest that Qantas Holidays has more ability than the current New Zealand inbound tourism marketers. 3.2.3 With or without the Alliance, Qantas Holidays has the opportunity and incentive to promote dual destination travel to New Zealand and Australia. Qantas already has trans Tasman and New Zealand airline operations to feed. 3.2.4 The Applicants’ claim that this is an additional benefit that would be created by their Alliance cannot be sustained. 3.3 Increased engineering services contracting 3.3.1 With an Alliance, Qantas agrees that Air NZ will be its preferred supplier for sub-contracted heavy maintenance work, with the “likely” result that Air NZ’s engineering business would receive 80% of such work, compared to 78% at present. 3.3.2 Without an Alliance, the Applicants claim Qantas is most likely to seek out the most cost-effective heavy maintenance arrangements available in the region. As a result, the Air NZ engineering division’s share of sub- contracted heavy maintenance work is likely to fall from 78% in 2002/03 to as low as 10% in subsequent years. 3.3.3 The Applicants’ consultants NECG state (p152): “Thus the Alliance could provide annual exports of engineering maintenance services to New Zealand of about $45 million 18/02/2003 12:28 compared to $6 million without the Alliance. This is an annual benefit of approximately $39 million. 3.3.4 This analysis exaggerates the additional value of the benefit to New Zealand. The additional value of the benefit is essentially the value of the growth of Air NZ engineering activity from 78% of the work sub-contracted by Qantas today to 80% in future – not the difference between 10% and 80%. 3.3.5 The work currently being undertaken for Qantas by Air NZ was won without an Alliance, and in the face of international competition from other tenderers. 3.3.6 Provided the current international competitiveness of engineering services offered by Air NZ is sustained, there seems little logic to the suggestion that its share of the work would diminish without the Alliance. 3.3.7 It could only diminish if Qantas decided to deny itself a price, time or quality advantage and place its sub-contracted heavy maintenance work with other suppliers, and, presumably. with other suppliers that are associated with other airlines which also compete with Qantas. 3.3.8 Equally, there seems little logic to the sugggestion that a 22.5% interest in Air NZ would cause Qantas to ignore price, time or quality advantages offered by other heavy maintenance suppliers over the services offered by Air NZ’s engineering division. 3.3.9 If the arrangement proposed in the Transaction results in Qantas giving preference to a less efficient supplier for its heavy maintenance sub- contracting, or if it leads to an easing of pressure on Air NZ to maintain the international competitiveness of its heavy maintenance operations, then it would be to the detriment of both Australia and New Zealand as a whole 3.3.10 Diminished efficiency in Air NZ engineering services would also affect New Zealand to a greater extent than Australia. It would impact on all Air NZ services and only affect a comparatively small part of the Qantas airline operation. 3.3.11 The potential detriment of diminished efficiency at Air NZ does not figure in the calculations of the Applicants. If they do not see this as a risk, then the diversion of contracted engineering work by Qantas to other suppliers would be at additional cost to Qantas and would undermine the efficiency of its operations in competition with Air NZ. 18/02/2003 12:28 3.4 Increased freight capacity benefits 3.4.1 The Applicants’ suggest that additional benefits of $3.3 million per annum will be derived from improved freight operations that will be made possible by the proposed Transaction and their alliance. 3.4.2 These additional benefits appear to be generated from two sources: (a) The introduction of Qantas B744ER equipment on routes between Australia, New Zealand and the United States; and (b) The introduction of “back of the clock” trans-Tasman flying utilising Boeing 767 aircraft that are currently idle overnight in Melbourne.